This paper models tax competition for mobile firms that are differentiated
by their productivities. Because taxes affect the distribution
of firms, they affect wages, prices, and the number of firms. From
the social planner's perspective, optimal taxes efficiently distribute
income between private and public consumption and are harmonized,
providing the optimal number of firms. This is not a Nash
equilibrium. As is common in such models, equilibrium taxes are
inefficiently low. Furthermore, there is no pure strategy equilibrium
with equal taxes resulting in too many firms. This illustrates a new
distortion from tax competition and a new benefit from harmonization.
(JEL H21, H25, H87)
Davies, Ronald B., and Carsten Eckel.
"Tax Competition for Heterogeneous Firms with Endogenous Entry."
American Economic Journal: Economic Policy,
Taxation and Subsidies: Efficiency; Optimal Taxation
Business Taxes and Subsidies including sales and value-added (VAT)
International Fiscal Issues; International Public Goods